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Thursday, June 21, 2012

UPDATE-1: Debt fuelled economy unsustainable? Gee, what a surprise

Canada's relatively healthy economy has been largely based on borrowed money but the situation cannot go on indefinitely, Bank of Canada governor Mark Carney warned Thursday.

Relative to the circus currently going on in the EU, or the $15T and counting debt in the U.S., maybe. But let me ask you something, if to pay your rent you have to continuously borrow money, would you consider your personal finances "healthy"? They may be relatively healthy when compared to the homeless but then again it is this "relatively healthy" path which often leads to homelessness.

If you've been reading my blog this admittance by Carney shouldn't surprise you. Yet at the same time Carney has the audacity to make statements such as this:

ON QUANTITATIVE EASING:

"I would say that the evidence from the U.S., the evidence from the U.K., to some extent from Switzerland where they've done in it in a slightly different way but the same concept, has been that these policies are effective. They do provide additional stimulus. Calibration is always an issue and in the fullness of time one always has to look at exit issues as well. But they are effective."

So which is it Carney? Does more debt work? Or is that just a way for you central bankers and corrupt politicians to kick the can down the road for another week while you invent whatever new Operation Twist is coming up next? That right there should tell you everything you really need to know about the global confidence economy, that we are hoping something called "Operation Twist" will fix it.

ON AN EU BANKING UNION:

"I think that in order to have, and I'm not alone in this, it is a view that would be shared by most of if not all of the principals in Europe, by which I mean heads of state and central bankers, that to have a durable monetary union it does require first a banking union, which is what's being discussed right now. That's necessary."

Heads of State and Central Bankers - the only important people left in the world if we were to believe this bunch. I don't, do you?

This announcement is coming at the same time Flaherty (for the fourth time in recent memory) plans to "tighten" Canada's mortgage rules again. Tighten is one of my favourite words as I have explained before. But what's even better? Well Flaherty is "tightening" the rules (again, for a fourth time) "to avert a bubble". Yes, that's right, now that we are at the top of the bubble and credit and debt problems are appearing Flaherty thinks somehow we can avert the bubble we are already in and have been for years by making token changes to mortgage rules. Interest Rates? Well we can't raise those, I mean Canada's debt based economy is "relatively healthy", but not that healthy!

If Canada's economy is "relatively healthy", it's the sort of healthy that keeps Mr. Burns alive. So many cancers, so many frauds, so many scams, all working together in balance to create the appearance of stability. However, address one problem and the rest comes crashing down. If we raise interest rates we lose trade with U.S. and if we don't debt will continue to grow because it will be cheap, we're not suffering from any form of Dutch Disease, what you see before you is a Mr. Burns disease, the Mr. Burns economy.

The "economically superior" conservatives have a lot of explaining to do, but in classic Mr. Burns fashion there only response so far has been "release the hounds".

According to a Bloomberg report citing two unnamed sources with knowledge of the plans, the ratings agency will downgrade a slew of major international banks including UBS, Credit Suisse, Morgan Stanley, HSBC, Goldman Sachs, Citigroup and the largest Canadian bank, the Royal Bank of Canada.

Where as years ago Canada was telling the world to model our banking system, it looks like instead we've decided to model theres. Of course, I am being sarcastic, our banking system was always exactly the same as theirs, the difference which provided an illusion of financial stability was that we are a net-exporter while currently troubled countries are net-importers.

As credit drys up for the importers and less imports are purchased the full effect of the "global downturn" will begin being felt here at home as our domestic economy comes nowhere close to the productivity that would be required to counter-act the loss in exports. This effect is already in full force.

The strength in manufacturing defies conventional thinking about Canada’s economy: at a time when factory owners are being told the future lies in spreading their goods throughout emerging markets, factories are getting a boost from sales at home.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.